Once an estate planning operative for only the rich and famous, trusts are commonly used today to facilitate estate planning for everyone. While empty-nesters downsize and seek out residences that are more maintenance free—such as co-ops or condos—they are also seeking to create an estate plan that insures a distribution of their assets with minimum tax consequences. Accordingly, co-op boards are increasingly faced with requests to approve transfer of ownership of co-op apartments to trusts. What are the ramifications of such transfers, and what should a board do when faced with such a request?
Generally, the co-op is at no greater risk with a trust as a shareholder than it would be with an individual. Therefore, there normally is no legal reason for a board to reject a requested transfer. However, a review of relevant documentation by counsel—as well as the reasons prompting the proposed transfer—is prudent to insure that there are no unusual issues raised with regard to the transfer of the cooperative’s stock shares to the trust.
Obviously, the trust instrument itself should be reviewed. It is appropriate to require the shareholder requesting the transfer to bear the burden of paying the co-op’s legal fees incurred in reviewing the necessary documentation associated with the requested transfer to the trust. Some trusts are such that the shareholder reserves the right to use the cooperative apartment for a fixed number of years.
In order to insure that an apartment is occupied only by the initially approved shareholder (the grantor to the trust) and his or her immediate family after the shares are transferred to the trust, the board should require the shareholder and his or her trustees to execute an occupancy agreement stipulating that the grantor and the grantor’s immediate family will be the sole occupants of the apartment throughout the term of the trust.
Furthermore, to insure that maintenance payments and assessment charges are made during the term of the trust, prior to approving any transfer to a trust, the board should seek a personal guarantee of the proprietary lease obligations by the grantor.